Budget 2019 Ensures Vigilance, Short-Term Liquidity For Shadow Banks: India Ratings

The Union Budget for 2019-20 ensures strong vigilance and short-term liquidity for non-bank finance companies (NBFCs) as well as housing finance companies (HFCs), credit ratings agency India Ratings and Research said on Wednesday. Accordingly, the proposed Finance Bill empowers the Reserve Bank of India (RBI) to undertake corporate restructuring of non-banking finance companies and housing finance companies in public interest, the agency said.

"This could enable the RBI to act upon specified entities, enabling ring fencing to insulate from the spill-over risk; in the current scenario this is appropriate," India Ratings said in a statement.

According to India Ratings, the proposed framework will help in tackling the contagion risk by the regulator especially for extreme cases.

Apart from the long-term regulatory empowerment of the RBI, the credit ratings agency pointed out other budgetary proposals which will ensure short-term liquidity.

"The provision of a partial credit guarantee by the government to cover the first loss of up to 10 per cent on the pool of assets purchased from NBFCs by public sector banks for a period of six months could help infuse liquidity in NBFCs," it said. 

"Additional liquidity has been made available to NBFCs and HFCs by allowing one per cent of net demand and time liability to be included in the liquidity coverage ratio computation to the extent of incremental outstanding credit to NBFCs and HFCs."